Czech Republic

Risk assessment

Growth dependent on European demand

In 2013, as in 2012, the Czech economy will suffer from the weak eurozone growth and from the austerity policies in place. Uncertainties over economic prospects as well as the political reasons for increasing VAT by one point put downward pressure on household consumption, which represents 50.7% of GDP. However, consumption will recover in the 4th quarter of 2013 due to a slight easing of the austerity policies at the end of the same year in the run up to the 2014 parliamentary elections. The job market will continue to worsen with long-term unemployment reaching 37% against 23% at the end of 2009. The Czech Central Bank cut its key rate three times in 2012 without impacting consumption. It is now at a floor of 0.05%. In the short term this accommodating monetary policy will benefit Czech exports, since Czech products will gain in competitiveness due to the depreciation of the Czech koruna. The country’s economy is very open: total foreign trade represented 145% of GDP in 2012. However, the economy’s complete integration into European manufacturing processes will prevent the country from benefiting from long-term from the fall in its currency. Moreover, the country suffers from a double exposure since 84% of exports are concentrated within the European Union (with 66% in the eurozone) and 17.5% relate to car manufacturing.  In 2013, inflation will be below 3%, although higher than in 2010 and 2011 due to the VAT increase and the higher cost of imported products. Meanwhile, the Czech banking system, owned mainly by eurozone banks, could be a source of concern. However, unlike the majority of East European countries, the subsidiaries are largely financed by domestic deposits and are conservative with regard to prudential rules.

Reforms putting public finances in order

The government, called to order at the end of 2009 by the European Commission, brought the current account deficit down to around 3% of GDP. After fierce discussions within the coalition, the government approved a series of budgetary reforms (health and tax system) aimed at reducing the deficit and limiting public debt. The most important reforms relate to reduced fiscal allowances on home saving plans and stricter conditions for obtaining unemployment benefit. Moreover, the implementation in 2013 of a reform adopted in 2011 (despite much criticism) will confirm the principle of a funded pension system, which will gradually replace the pay-as-you go system. Public debt, up over 10 points compared with 2007, will remain sustainable and is entering a stabilisation phase.  The current majority, however, wants to add 4 new critical levels of debt linked to the adoption of budget adjustments. So, if the debt exceeds 40% of GDP, preventive adjustment measures must be taken; from 45% public spending will be frozen; above 48% the budget must be immediately reviewed so as to halt the rise and there will be a vote of confidence in the government if the debt reaches 50% of GDP. Investor confidence is essential for the country as the current account deficit is covered by foreign direct investments weakened by the European environment. The current account deficit has been shrinking since the second half of 2011, especially because of falling domestic demand in response to the austerity policies. When these are eased in late 2013 the current account deficit will rise slightly.

Reforms in difficult social context

The Czech Republic is conducting an ambiguous policy with regard to the EU, a divisive issue for the coalition in power. This raises fears of Czech diplomacy being marginalised in Europe though joining the eurozone remains an ambition. European questions are a major source of disagreement between President Vaclav Klaus, hostile to an integrated Europe, and the social democrats, centrists and Christian democrats who, like the Czech population, are more pro-Europe.
Already weak, the coalition’s centre-right parliamentary majority is no longer assured after dissensions appeared in its ranks. With a big victory for the social democrats in the October 2012 regional and senate elections, the opposition is calling for early parliamentary elections to avoid any political deadlock until June 2014. One can probably assume power will change hands at the next presidential elections in January 2013. Meanwhile, corruption is still crippling the country with many instances involving ministers. To inject fresh democratic impetus in the face of declining participation and popular discontent linked to corruption, the next president will be elected for the first time by direct universal suffrage. The president will, however have only a representational role.

Payment incident index

MEANS OF PAYMENT AND COLLECTION METHODS

Bills of exchange and cheques are not widely used, as they must be issued in accordance with certain criteria to be valid.

For unpaid and protested bills of exchange (smĕnka cizí), promissory notes (smĕnka vlastní) and cheques, creditors may access a fast-track procedure for ordering payment under which, if the judge admits the plaintiff’s application, the debtor has only three days to contest the order against him.

Bank transfers are by far the most widely used means of payment. Leading Czech banks – after successive phases of privatisation and concentration – are now linked to the SWIFT system, which provides an easier, quicker and cheaper method for handling domestic and international payments.

Inspired by EU regulations, the Act on Payment Systems, in force since 1^st January 2003, sets the rules for transferring funds in the enlarged European area and empowers the Czech National Bank (Česká Národni Banka) to oversee local use of electronic payment instruments.

It is advisable, as far as possible, not to initiate recovery proceedings locally because of the country’s cumbersome legal system, the high cost of legal action and lengthy court procedures – it takes almost three years to obtain a writ of execution due to a lack of judges adequately trained in the rules of the market economy and proper equipment.

Service of final demand for payment supported by proof of debt reminds the debtor of his payment obligations, increased by past-due interest payable from the day after the payment date stipulated in the commercial contract.

Since 28 April 2005, the applicable rate, unless agreed otherwise by the parties, is the “repo” rate applied by the Czech National Bank, in force on the first day of the reference half-year; increased by seven percentage points.

Should the debtor lack the funds needed for immediate payment, it is advisable to seek an out-of-court settlement based on a schedule of payment, preferably drawn up by a public notary, accompanied by an enforcement clause that allows them, in case of default by the debtor, to go directly to the enforcement stage, after the court admits the binding nature of that document.

Where creditors have significant proof of claim (unpaid bills of exchange or cheques, acknowledgement of debt, etc.), they may obtain an injunction to pay (platební rozkaz) under a fast-track procedure – which may nonetheless take from three months to a year depending on the workload of the courts – but which does not necessitate a hearing as long as the claim is sufficiently well founded.

The advance on court fees, at the claimant’s expense, amounts to four per cent of the total claim.

Where a debtor contests an injunction within fifteen days of its service, an ordinary procedure will then apply with the parties subsequently summoned to one or more hearings to be heard and produce evidence. The judge will then decide whether to throw out the plaintiff’s application or order the debtor to pay principal and costs.

Ordinary proceedings are partly in writing with the parties filing submissions accompanied by all supporting case documents (original or certified copies) and partly oral with the litigants and their witnesses heard on the main hearing date.

Any settlement reached between the parties during these proceedings and ratified by the court is tantamount to a writ of execution, in case of subsequent non-compliance with the agreement obtained.

Since 1^st July 2009, an amendment to the civil procedure code intended to accelerate legal proceedings by introducing electronics into the procedural stages, by obligation of legal entities to be equipped with electronic data boxes, by reducing the caseload of judges, and reducing procedural delays (presentation of all new facts and means of evidence by the end of the first hearing).

The laws governing commercial companies, commercial papers (bills of exchange, cheques, promissory notes, and so on), unfair competition, and bankruptcy, for example, fall under the jurisdiction of regional courts (krajský soud) or the Prague regional court known as the municipal court (mĕstský soud).

To speed up execution of the excessive number of pending judgments moreover, a new body of bailiffs (soudní exekutor), established since May 2001 and invested with broad investigative powers to identify and locate a debtor’s assets before proceeding with actual execution of the court order, is gradually eliminating processing delays.

For that bailiff category, a different fees schedule applies, based on the amount concerned by the execution.